Anyone who lives, works, or invests abroad has a potential exposure to foreign taxes. Not only is property investment no exception to this general rule, it is actually one of the fields with the greatest potential exposure to foreign taxation.

The worst thing of all, for a UK resident property investor, is that you will often be exposed to tax in both countries – the UK and the country in which you are investing.

Foreign taxes which are based on similar principles to UK Income Tax or Capital Gains Tax may generally be deducted from any UK liability for those taxes (If a Tax Treaty exists between the UK and the country in question.) If they exceed the UK tax bill, however, then no repayment is possible. This means that the investor effectively suffers an overall tax burden equivalent to the higher of the two tax rates applying.

If the foreign tax takes a form which the UK Treasury do not recognize as being equivalent to one of our own taxes, however, then no deduction is possible. This leaves the investor fully exposed to both countries' taxes. The effect of this could be to produce an extremely high rate of tax overall, or even an after tax loss.

Many investors are attracted by the possibility of high returns on foreign property investments, but it is essential to bear in mind the effective total tax exposure on these investments. When comparing the rates of return on potential investments, the investor should always consider the after tax return.

Example

James will therefore be better off if he invests in the Isthmus Republic.

What this example shows is that, when investing abroad, it is vital to take foreign taxes into account. It further shows that it is important to consider not only the rate of the foreign taxes, but also the nature of those taxes. The key factor for a UK resident investor is whether the foreign tax will merely be classed as a business expense for UK tax purposes or will be fully deductible from the UK tax bill as a recognized equivalent tax.